Thelen Reid Brown Raysman & Steiner LLP

For many years, contractors and construction lawyers in California understood that a bright line existed regarding potential liability for construction defects - no liability 10 years after substantial completion of the project. The recent decision by the California Court of Appeal in Acosta v. Glenfed Development Corp., 128 Cal.App. 4th 1278 (2005) took a narrow exception to the 10-year rule, for actions based on "willful misconduct or fraudulent concealment," and expanded the exception to the point that it may swallow the rule. In so doing, the Court took a statute intended to provide certainty and reduce risk and created a great deal of uncertainty and potential added risk.


Background

Code of Civil Procedure §337.15 provides a statute of repose that bars actions to recover damages for construction defects more than 10 years after substantial completion of the work of improvement. Case law has clarified that this 10-year bar does not apply to personal injury claims. See, Geertz v. Ausonio, 4 Cal.App.4th 1363 (1992).

In Acosta, the court granted summary judgment in favor of a developer/contractor on the grounds that 47 of the 59 named plaintiffs had been brought into the case more than 10 years after recordation of notices of completion on their single-family homes. The plaintiffs argued that an exception to the 10-year rule applied, namely subdivision (f) of §337.15, which provides: "This section shall not apply to actions based on willful misconduct or fraudulent concealment."

In opposition to the motion for summary judgment, counsel for the plaintiffs asserted this exception.

Plaintiffs submitted two declarations from expert witnesses that listed defects that are commonly found in reports by expert witnesses in substantial construction defect litigation, including:

		Horizontal attachments for vertical truss supports in the garages were missing.
		Lack of adequate shear transfer.
		Missing or inadequate holddowns.
		Missing or inadequate straps and hangers on load-bearing members.
		Some driveways were short by as much as 3.5 feet.
		Stucco defects.
		Leaking windows.
		Less expensive kraft paper used to flash around the windows instead of the asphalt polyethylene sheeting specified on plans approved by the city.

The experts opined that most of the defects undermined the structural integrity of the homes and created a substantial risk of injury to persons and/or property. They also opined that the defects:

		Involved conspicuous failures to comply with applicable building code provisions, with the city-approved building plans and with basic construction industry practices.
		Were of a type that inevitably would have been recognized by any competent construction supervisor conducting even minimal day-to-day inspections of the type required in a construction project such as the one at issue and would have caused the construction supervisor to require the responsible subcontractors to remedy the defects immediately before work could proceed on the houses.
		Had the financial impact of producing, in defendants' favor, substantial cost savings.

The experts stated that the defects appeared to be the result of willful misconduct by defendants in that they were "so serious and prevalent that they were either the result of [a] deliberate decision to 'cut corners' for cost savings or the result of a near total, virtually reckless, failure by the developer to adequately supervise subcontractors."


Analysis

The Acosta court recognized that other case law had emphasized the purpose of §337.15 was to "provide a 'firm and final' outside limitation period for construction suits involving claims for latent defects." Nonetheless, the court held that the "willful misconduct exception" applied, holding that the term encompassed "not only intentional wrongdoing, but negligence of such a character as to constitute reckless disregard for the rights of others."

The Acosta court was able to locate only one other decision applying the exception in §337.15 (f), Felburg v. Don Wilson Builders, 142 Cal.App.3d 383, 390 (1983). There, a defendant builder sold plaintiffs a home that had been built over an oil sump. After subsidence caused considerable damage to the home, the plaintiffs filed suit about 12 years after substantial completion of the home. In opposition to the defendant's motion for summary judgment, the plaintiffs submitted an expert declaration that stated that "it would have been impossible to pour the foundation of the home without seeing the evidence, in plain view, that the lot was over an oil sump." The plaintiffs also offered evidence indicating that the builder actually had received a boring report from a soils engineer that showed the existence of the oil sump on or near the plaintiff's lot.

The Acosta court found that the facts in Felburg were "remarkably similar" to those in the Acosta case. It is submitted that the obvious knowledge in Felburg that a house was being built on a woefully deficient construction site with total disregard of a soils report showing the existence of the oil sump is not remotely, much less remarkably, similar to garden variety construction defects that were present in the Acosta case. Indeed, the principal defects in Acosta appeared to be defects that may have undermined the structural integrity of the houses and which created the risk of injury but that had not actually caused any injury.

Importantly, the Acosta court held that the developer/contractor could be found to have engaged in willful misconduct even if it did not have actual knowledge of the defects, for example, where the work was performed by subcontractors. The court reasoned that the developer/contractor was liable to buyers for the acts of the subcontractors because developers/contractors "have supervision over the construction, including the work of the subcontractors" and found that this duty was non-delegable. The court also found that imposing supervisory obligations on developers/contractors was consistent with the contractor's license law. Finally, the court found that under the exception in subdivision (f), which states that it applied to "actions based on willful misconduct," "it is only necessary that the action be based on and arise from willful misconduct by someone. It does not matter whether defendants committed such misconduct directly or it was done by subcontractors hired by them."


Comment

The California Supreme Court denied a petition for review and request for depublication. Thus, plaintiffs now have authority that could make overcoming the 10-year statute of repose in most construction defect cases easier. The 10-year statute of repose no longer will be seen as an almost insurmountable barrier.

It is difficult to imagine a case where a creative plaintiff's lawyer will be unable to come up with a declaration that the construction defects were the result of a deliberate decision to cut corners for cost savings and that there must have been a near-complete failure by the developer to exercise even minimal supervision. In such cases, it may be difficult for a defendant to escape from the case by a motion for summary judgment that relies on the 10-year statute of repose. Thus, plaintiffs frequently will be able to get cases before a jury that would otherwise have been disposed of by summary judgment. Whether the conduct by the developer/contractor was willful misconduct normally will be a question of fact for the jury. Colich & Sons v. Pacific Bell, 198 Cal.App.3d 1225 (1988).

The Acosta decision is not remarkable in its application of the "willful misconduct" exception but rather in the manner in which it applied the exception. It allowed expert declarations that were not remarkable and that did not remotely approach the egregious facts in the Felburg decision to create a triable issue of fact, even against a developer/contractor when there was no direct evidence that the developer/contractor had knowledge of the defects. In effect, the Acosta decision could create strict liability by the developer/contractor for any willful misconduct by the subcontractors or when the defects were the result of a lack of supervision.

Some steps can be taken by developers/contractors to try and keep the 10-year limitation period intact. This includes conducting special inspections and keeping good records of such inspections. This would tend to show that proper supervision was provided and that attention to quality control was given, perhaps enough to overcome the conclusory and self-serving declarations of the plaintiff's experts on a motion for summary judgment. Notably, there was no discussion in Acosta of the fact that the allegedly grossly defective work presumably had passed inspections by local building officials.

Special inspections actually have been fairly common for the last five years on condominium projects in California, as most such projects were built with wrap OCIP insurance policies, which typically require such inspections as part of the OCIP program. However, such OCIP policies typically also have 10-year "tail" coverage following substantial completion. Under Acosta, construction defect actions can be brought after the expiration of the 10-year tail, leaving developers, contractors and subcontractors exposed to liability for construction defects with no insurance coverage -- thus further chilling the market for construction of single-family housing in California.

If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form.

For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2005 Thelen Reid Brown Raysman & Steiner LLP